Could Japan abolish yield curve control? 🔍

- Also: Learn how India is setting its sights on becoming a global manufacturing hub. Enjoy some of the top intelligence from Goldman Sachs. --------------------------------------------------------------- In today's edition: - Are CEOs feeling more optimistic about the economic outlook? We start by asking our own CEO, David Solomon. - Markets are [scrutinizing a key part of Japan's monetary policy](. - And [2023 could be another strong year for commodities]( according to GS Research's Jeff Currie. (Was this newsletter forwarded to you? [Sign up now.]( --------------------------------------------------------------- David Solomon: The economic outlook is uncertain, but CEO sentiment has improved In a recent client call, Goldman Sachs Chairman and CEO David Solomon joined Sharmin Mossavar-Rahmani, head of Asset and Wealth Management's Investment Strategy Group and the chief investment officer of Wealth Management, to discuss a range of topics about the year ahead. Here are some of the key takeaways: (Above L to R): Goldman Sachs' David Solomon & Sharmin Mossavar-Rahmani - CEOs are feeling more optimistic. According to Solomon, sentiment among the CEOs who attended the World Economic Forum in Davos has improved since mid-2022. “The consensus view at the moment is for a softer landing than what we were all expecting six months ago,” he says. He attributes the boost in morale to two factors in particular: inflation appears to be easing and a mild winter in Europe has kept energy prices low. “I met with a number of those CEOs [from] Germany, and I would just say they feel a lot better,” Solomon notes. “The glass was empty in June. The glass might not be half full, but it's definitely much more full than it was in June.” - Investors are still positive about investing in the U.S. for the long term. Solomon believes there are “still enormous competitive advantages in the way the U.S. is positioned” and that general sentiment about the U.S. is strong. - Risks to the outlook in 2023. In its 2023 Outlook, [Caution: Heavy Fog]( the Investment Strategy Group highlights that in addition to threat of recession, we face a much larger array of geopolitical risks, such as an escalation of the Ukraine-Russia war, high U.S.-China tensions, and debt-ceiling negotiations in the U.S. Solomon argues that cybersecurity is also a key priority for companies, noting CEOs are “spending a lot of time on cyber and protection for their businesses.” He is optimistic that Goldman Sachs can navigate these risks. “It's really, really important that we focus very carefully on policy and leadership and get things more right than wrong as we look forward,” he says. --------------------------------------------------------------- Could Japan unwind a key part of its ultra-loose monetary policy? A core pillar of Japan's ultra-easy monetary policy — known as yield curve control (YCC) — has come under increasing market scrutiny in recent months, raising the possibility that the country could eventually abolish it altogether, according to strategists in Goldman Sachs' Global Banking & Markets. The Bank of Japan originally introduced YCC in September 2016 to head off deflationary risks and to achieve an inflation target of 2%. But now, rising inflation, high wage growth, concerns about market functionality and the swearing-in of a new BOJ governor all make a change of course possible, says Ryoya Wakamatsu, a yen rates market strategist. However, the path ahead is far from clear, according to Wakamatsu. [He answers some important questions about how the policy could change going forward:]( - Wakamatsu says the BOJ could make further adjustments to YCC as early as its next monetary policy meeting (MPM) in March. “Policymakers now arguably have a very good window to unwind YCC at a time when YCC is appearing less and less sustainable,” Wakamatsu says. “While the BOJ has repeatedly stressed the necessity for stronger wage growth to accompany rising inflation prior to any YCC adjustments, we and the market think every upcoming MPM has high chances for significant policy change.” - In December, the BOJ surprised markets by lifting its cap on 10-year government bond yields from 0.25% to 0.5%, according to Wakamatsu. “The BOJ explained that this was a technical adjustment to address market functionality,” he says “However, market participants saw this as potentially just the first step in unwinding YCC.” - It is still unclear how the BOJ will proceed in 2023 and opinion on the policy's success is mixed. YCC's original aim of maintaining a low yield curve worked for over six years until now, Wakamatsu says. “Inflation is above target, but the BOJ has stressed that the current inflation is supply driven and transitory. There are also growing questions about the sustainability of YCC,” he adds. [To learn more, read the full Q&A.]( --------------------------------------------------------------- As China reopens, what's ahead for commodities? Commodities were the best-performing asset class in 2022 but have recently taken a hit as recession fears loom. So what's in store for them in 2023? In the latest episode of [Exchanges at Goldman Sachs]( Jeff Currie, global head of commodities research,[explains why commodities are poised to outperform.]( As the world's largest commodity consumer, China has the potential to boost global oil demand by as much as 2% as its economy reopens and the property market improves, Currie tells host Allison Nathan. “This is going to put a lot of stress on the system,” Currie says. “A stronger China helps Germany and Europe through exports of capital goods and luxury items. And a stronger China and a stronger Europe leads to a weaker U.S. dollar, which then acts as a tailwind for commodities.” More broadly, a lack of investment is hampering supply in the sector. “Not only are we not seeing more investment, real capex declined sharply last year with the inflation that occurred in the industry,” Currie says. “So [that] little investment, when corrected for inflationary pressures in the sector, was an outright real decline in investment.” --------------------------------------------------------------- January QuickPoll: A mild recession, weaker dollar and China equities As the Federal Reserve shows signs of slowing its hiking cycle, investors are optimistic that the U.S. economy can avoid a deep recession, according to the January QuickPoll of more than 600 institutional investors. Key findings include: - About 62% of participants believe the U.S. economy will enter a mild recession in 2023, although 56% expect the Fed could start cutting rates in the first half of 2024. - Investors increasingly believe the U.S. dollar will weaken as other central banks in Europe and Japan move into tightening territory and China starts to reopen, says Oscar Ostlund, global head of content strategy, market analytics and data science for Global Banking & Markets' Marquee platform. - Investors are increasingly bullish on commodities and Chinese equities, with 40% of respondents saying the country's equities are the best way to benefit from its reopening. --------------------------------------------------------------- India sets its sights on becoming a global manufacturing hub Global geopolitics and supply chain disruptions have brought two pressing issues to the fore for India's policymakers: energy security and an overreliance on imports. The government's “Make in India” initiative aims to address both and help the country become a global manufacturing hub. The $33 billion Production-Linked-Incentive (PLI) initiative could generate $455 billion in incremental revenue over five to six years and generate more than 6 million jobs, according to Goldman Sachs research. To date, more than 660 companies have been approved to participate in PLI projects. “The electronic PLI has already taken off,” says Pulkit Patni, an analyst covering India's industrials and utilities sectors. “We've seen a seven-fold increase in mobile exports.” PLIs in India's electronics, energy transition and semiconductors industries will have the greatest overall impact, with a combined 66% of the potential new revenue, according to Patni. While the electronics PLI is best placed for near-term success, the impact of the semiconductor and energy transition PLIs will lag because of gaps in industry expertise and dependence on global supply-chains, Patni adds. --------------------------------------------------------------- Briefings brainteaser: How much economic power does your passport have? Japan recently topped an index ranking the strength of passports around the world, with Japanese passports giving visa-free access to 193 destinations around the globe. What percentage of the global economy does that amount to? A) 81% B) 89% C) 95% D) 98% [Check your answer here.]( --------------------------------------------------------------- ICYMI: In the media [Forbes]( January 25 [Former Amazon exec Marco Argenti drives a remarkable digital transformation at Goldman Sachs]( [Bloomberg]( January 24 [Karoui: Short Duration, Long Credit Risk]( [Bloomberg]( January 23 [Goldman Sachs' Trivedi on slow US Growth]( --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The data provided in this newsletter is for information purposes only and should not be construed as investment or tax advice nor as a recommendation to buy, sell, or hold any particular security. Goldman Sachs believes the data in this newsletter is accurate, but does not verify its accuracy independently and does not warrant or guarantee that it is accurate or complete. 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